Factsheet: Interest-free deals

Tempted by that new plasma TV or home theatre
system, but don't have the money right now?

Many major department stores offer interest-free deals that let
you take goods home before you pay for them.

But think carefully before you sign up for one - interest-free
doesn't mean cost-free.

How do interest-free deals work?

Most larger stores offer interest-free deals
for items like computers, electrical appliances, lounge suites and
other household goods. For some, you pay a deposit upfront. For
others, you don't pay anything upfront.

There are usually two ways you can pay for interest-free deals:

Regular monthly payments (payment by
instalment).

Buy now, pay later (deferred payment): you do
not need to make any payments until the end of the interest-free
period, at which time the full amount is payable, together with
fees and charges.

Different retailers offer different deals, so make sure you
know exactly what you're being offered. Ask questions before you
sign up for anything.

With an interest-free deal, you almost always end up with a
credit card or store card that
has a higher limit than the cost of the goods you are
purchasing.

Maya wasn't tempted to buy more than she needed

We went shopping for a new fridge and dishwasher and decided
that an interest-free deal would be good for us because, after
renovating, we didn't have enough cash to pay for them. My husband
wanted to get a new plasma TV and home theatre as well, because the
salesman said we could bundle it all together.

But when I asked what would happen if we didn't manage to pay
everything off within the interest-free period, I was shocked at
how much more it could cost us. They charge you nearly 30% interest
on whatever you haven't paid off!

There was no way we could afford to risk that on top of our
mortgage. So we only got the kitchen stuff interest-free. We're
paying more than the minimum monthly amount to make sure we pay it
off in time, so I'm happy. And my husband will just have to wait
until we've saved up for a new TV!

TIP: Watch out for these hidden traps

Watch out for the end of the interest-free
period

Your credit provider is under no obligation to remind you when
the interest-free period is due to run out, so you need to keep on
top of this yourself. If you do not repay the total amount of your
purchase by the end of the interest-free period, your credit
provider will start charging you interest. To
avoid this, always aim to repay the debt early.

The interest rate charged if you do not repay during the
interest-free period could be very high - up to 30%, compared with
standard interest rates on credit cards, which average between 12%
and 20%.

The minimum monthly payment is often not
enough

If you're paying by instalment, the minimum monthly
payments suggested by the retailer who signs you up (or
that appear on your monthly statement) are often not
enough to pay off the full purchase price before the
interest-free period runs out. This means you may be left with a
large outstanding amount to pay at the end of the interest-free
period. So make sure your agreed repayments are enough to pay off
the full amount within the interest-free period.

Once you've signed an agreement, you may find you cannot make
extra payments beyond those agreed to in your
contract. So even if you want to pay out the deal early and get the
debt out of the way, you will be unable to do so.

Don't rely on the credit provider's assessment of whether you
can afford the loan-work out how much you will need to repay each
month to pay it off in full and on time, including
the account-keeping fee, and make sure you are confident you can
afford it before you sign up.

Interest-free doesn't mean fee-free

While an advertisement may have a headline like 'no deposit, no
interest, nothing to pay today', in most cases you will still be
charged fees. These could include an establishment
fee, a monthly service fee and a
late payment fee. For example, if you sign up for
an interest-free deal over four years, the monthly service fee
alone can add up to several hundred dollars.

Before you sign anything, ask about all the fees and charges so
you can include them when you're working out what your monthly
repayments need to be.

Store cards may cost you more

Interest-free deals can encourage you to spend more, especially
when a retailer provides you with a store card
along with your interest-free deal.

You'll often find that your new store card has a credit
limit that's higher than the value of your interest-free
purchase, so you've actually been given a new credit card and may
be tempted to purchase more goods on credit. Instead of
automatically accepting a higher limit, ask for it to be lowered to
the amount of the debt (that is, the full purchase price).

Store cards can be an expensive way to shop,
as they usually have higher interest rates than regular credit
cards. Also, extra purchases you make on your store card will not
attract the interest-free terms you signed up for in the first
place.

If you already have a credit card, compare your current
interest rate with that of the store card - chances are you will be
much better off continuing to use your existing credit card for any
future purchases. It may be better to just cut up the store card
that came with the interest-free deal.

Terms and conditions can be complicated

If you do decide to go ahead, make sure you know exactly what
you're getting into. For example, you may be charged
account-keeping fees and penalties if you miss
repayments, break the agreement or pay it off early.

Interest-free may not be the best way to buy
something

Interest-free deals can encourage impulse buying - for things
you want rather than truly need. Don't let a bonus offer or pushy
salesperson pressure you into a quick sale that you haven't had
time to think about properly.

Take the time to explore all your purchasing options first. You
may be better off waiting a while and saving up for the item.

Consider lay-by. This option may not be widely
promoted, but is usually available if you ask for it. With lay-by,
you pay your purchase off in instalments, with no extra fees or
charges. Of course, you have to wait until you've paid it off in
full before taking your purchase home, but you will save a lot of
money in fees and avoid getting hit with hefty interest
charges.

If you still want to go interest-free, remember that many
stores offer deals like these. So shop around for
the best price on the goods and the best terms on the interest-free
deal!

Six steps to smarter borrowing

Step 1.

Work out if you can afford to borrow

Before you get an interest-free deal, use our budget planner
at www.moneysmart.gov.au to see exactly where you spend your money
and how much you can afford in repayments.

Think about whether you can save up the money for the item, or
put it on lay-by. By doing this you won't pay
interest or fees, so it will cost you less. You may also get a
discount if you pay in cash.

Alternatively, see if there are other cheaper forms of credit
available.

If you're on a low income, you may qualify for a loan through
the No Interest Loan Scheme (NILS®), which offers
small loans for specific purposes, like buying a fridge or washing
machine. To find your nearest provider, go to www.goodshepvic.org.au or
call ASIC's Infoline on 1300 300 630.

Step 2.

Shop around for the best deal

If you decide to borrow, take the time to compare interest
rates and product features, and make sure you understand all the
fees and charges.

Ask questions about the terms and conditions
of the credit contract so you know what you're getting into. Find
out if there are penalties for missed repayments or paying off the
contract early.

If you are provided with a credit card along with your
interest-free deal, shop around online to compare the card with
other cards.

Research published by the independent consumer group CHOICE can
also help you find the right product for your needs and budget -
see www.choice.com.au.

Step 3.

Know who and what you're dealing with

Anyone who wants to engage in credit activities (including
brokers) must be licensed with ASIC or be an authorised
representative of someone who is licensed. If they aren't, they are
operating illegally.

There is currently an exemption from licensing for credit
assistance provided through some businesses (for example, retail
stores and car yards). While the store may be exempt, the actual
credit provider must still be licensed. If you are unsure who the
credit provider is, ask the person you are dealing with to point
out the name in your credit contract.

Anyone engaging in credit activities (for example, by providing
credit or assistance to you) must give you either a credit
guide (with information such as their licence number, fees
and details of your right to complain) or a written notice with
details of your right to complain about their activities.

Step 4.

Keep up with your repayments

Make your own repayment plan so that you pay
off your purchase in full by the end of the interest-free
period.

If issued with a store card, check the
interest rate and fees before using it to make additional
purchases. Avoid the temptation to buy more than you actually need.
If you do want to buy more on credit, it will usually be cheaper to
use a regular credit card than a store card.

Step 5.

Get help if you can't pay your debts

Act quickly if you are having trouble making
repayments. It may be difficult to face the problem, but ignoring
it will only make things worse.

If you can't make the full repayment, pay what you can. Contact
your credit provider without delay.

If you are experiencing financial difficulties, you have the
right to apply to the credit provider for a hardship
variation. If the credit provider refuses, you can
complain to its independent dispute resolution scheme for a
variation on the grounds of hardship (see step 6 below).

There are places you can go for help - visit
www.moneysmart.gov.au for sample letters and information about
support services such as financial counselling and legal
assistance, call the National Debt Helpline on 1800 007 007 or call
ASIC's Infoline on 1300 300 630.

If you think that a credit provider has acted unlawfully or in
a misleading way, you can complain to ASIC online at
www.asic.gov.au or call ASIC's Infoline on 1300 300 630.

Contact us

ASIC Infoline: 1300 300 630

Disclaimer

Please note that this is a summary giving you basic information
about a particular topic. It does not cover the whole of the
relevant law regarding that topic, and it is not a substitute for
professional advice.